Markets slow as debt worries increase
on February 11, 2013

US debt Feb13.pngThe blog is becoming worried about the likely outlook for Q2. Sentiment now seems to be weakening alongside the fundamentals of supply/demand:

Fundamentals. The start of 2013 has been a disappointment. Demand has shown some recovery after the low levels seen at the end of Q4. But there have been few signs of any real tightness in global markets
Sentiment. Confidence is beginning to evaporate, causing financial markets to diverge for the first time since 2009. For example, Brent prices have risen $3/bbl since the end of January, whilst US WTI prices have fallen the same amount

Thus Linda Naylor, one of ICIS’ most experienced editors, summarised European polypropylene markets as follows during the week:
“Under these circumstances a price crash cannot realistically be expected, but production will have to remain cut back if demand does not improve.”

Similarly, Becky Zhang reported on Asian polyester markets:
“In the wake of poor margins and weak demand, close to 5m tonne/year polyester capacity in China has been left idle for the long holiday.”

The key issue is summarized in the chart, based on a new report by Pimco (the world’s leading bond fund managers), on the implications of today’s increasing debt load for the US economy:

• In the 1950s, $1.30 of new debt was needed to create $1 of GDP growth
• In the 1980s, $4 of new debt was needed to create the same amount of GDP
• By the 2000s, $10 was needed
• Today, $20 is needed to get the same result

Policy makers refuse to accept the simple truth that we are unlikely to see much GDP growth in coming years. $4 of debt might have seemed affordable in the 1980s, when the BabyBoomers were young, and had their main productive years ahead of them. But ageing populations only need replacement products, and have less money to spend as they enter retirement.

Today it is sheer folly to try and maintain growth via engineering a massive expansion of debt levels. Anyone who has ever tried to pump up a balloon knows that it will burst if one tries to add too much air. The blog worries this is the risk that we may now be facing in Q2, after last year’s major debt expansions in the US, China and Europe. As Pimco warn:

“Credit is now funneled increasingly into market speculation (instead of) productive innovation”.

Benchmark price movements since the IeC Downturn Monitor’s 29 April 2011 launch, and latest ICIS pricing comments are below:
PTA China, red, down 11%. “Polyester demand slowed down during the week as most downstream textile factories have ceased production”
Naphtha Europe, dark brown, down 10%. “Demand in Asia, and US continues to pull naphtha for gasoline blending.”
HDPE USA export, purple, down 10%. “Spot ethylene prices have dropped by 7% since the last week of January”
Brent crude oil, blue, down 6%
Benzene NWE, green, up 8%. “Market was largely rangebound this week, with the US market stalling following several weeks of bullishness”
S&P 500 stock market index, brown, up 11%

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